Hedge fund manager Andrew Cunagin might be in the need of some therapy.

Hedge fund trader blasts high frequency trading

As Rinehart Capital Partners LLC, the fund Cunagin operated, closes shop, the primary trader had some vitriol he needed to get off his chest.  In his final letter to investors, he didn’t disappoint, blasting a stimulus driven economic environment dominated by high frequency trading predators in what he characterizes as a “dash for trash” market environment.

After beginning life in pre-crash 2007, Rinehart posted just slight losses of 12 percent in 2008, the sign of a market neutral fund in search of alpha. The most market neutral of all hedge fund strategies, managed futures, was up 18 percent in 2008, by contrast. He then further struggled, a Wall Street Journal report by Rob Copeland notes, spotting losses of 7 percent in 2012, quickly followed by a 15 percent loss in 2013 and down 4 percent through midyear in 2014. That’s not an auspicious start for a trader who boosts “market neutral” credentials as the reason for the loss.

Hedge fund Andrew Cunagin Rinehart Capital


Cunagin takes direct aim at the market dynamics that distorted “normal” market reactions, a charge made by many algorithmic traders who similarly operate market neutral strategies. The artificial market regiments have been “punishing harshly the market-neutral, alpha investor who discounts allocations on the basis of value,” he wrote in a letter to investors published in the Journal. “New paradigms have emerged as a result, defined by binary outcomes of risk-on/risk-off, taper-on/taper-off, win big/lose big.”

Hedge fund trader continued his rage on overall market environment

Cunagin continues his rage at the overall market environment and market structure plumbing that apparently conspired to trip up his market neutral strategy.

“Just as in previous boom-bust cycles, the seeds of destruction are sewn in the illusion of trend masquerading as truth, with momentum seeming to validate a widening gap between perception and economic reality,” he said, sounding very much like a managed futures trend follower in his views on faulty trend indicators in a stimulus driven market environment.  Managed futures is the world’s most uncorrelated hedge fund investment category, the market neutral performance benchmark.

What Cunagin did, unlike most managed futures firms, was focus his market neutral strategies on emerging markets. He soon discovered these markets are distorted like U.S. markets – but to a much greater degree. “I’ve heard from prominent allocators frustrated that “nothing seems to work in emerging markets.”

Then Cunagin lashes out at the most basic of trend following approaches. “Technical analysts assure us that, despite what you’ve been brought up to believe, a strategy of buying high (especially on dips) while selling low is what “works” in this market,” he wrote, pointing to a simple managed futures trend following strategy. The more sophisticated managed futures trend following strategies use a combination of volatility, price momentum and demand indicators to execute their trades.

More appropriate might be the trade manager’s focus on risk management, which is typically the key to success in market neutral strategies. In trend following win percentage typically hovers just above 50 percent, but it is the size of win relative to the size of loss that is one key to success.

Hedge fund trader performance worse than major managed futures indices

When compared to managed futures performance, Cunagin didn’t just underperform the stock market but he performed much worse than all the major managed futures indices.  As a result, the fund never got much past the $100 million in assets under management – a level difficult to support even a middle class lifestyle much less a hedge fund lifestyle.

After a hedge fund implosion, a trader can be tormented by many demons. Take it from me. At some point Cunagin might realize that blaming the market environment or market mechanics for losses, as opposed to looking in the mirror, makes it more difficult to move on.